the major consequences of bankfailures on financial stability, and out of the realization that a bankingcrisis is inevitably repetitive, governments decided to take precautionarymeasures in order to avoid the occurrence of bank runs.
These measuresconsidered the studies that explored the different reasons behind the bank runs.This paper will inspect policies tackling banking crises which act assafeguards to the banking system and the economy as a whole. In response to the Bank turmoil ofthe 1930s, government officials and monetary policymakers implemented certainpolicies in order to avoid bank runs and consequently lessen the risks accompanyingthem. Applying counter policies to escape the negative repercussions of bankruns is at the root of capital sufficiency requirements and deposit insurance. Federal deposit insurance was createdto avoid bank runs, and subsequently a large number of banks during the Great Depressionin United States urged the federal government to implement this, believing thatdepositors under insurance would react less to mass runs than those without. However,the insurance is only partially effective. According to Jacklin (1987), banksshould offer insurance in order to compete in financial markets; this piece of literature,and these types of policies, gave the depositors a way to protect theirdeposits and investments. Understanding the origins of bankfailures and the sudden deposit withdrawal is considered the first and mostcrucial phase when applying the policy which counters bank failures.
Forexample, if bank failures are caused by fundamental factors, then the policymakersshould work on supporting the financial regulation and supervision of a bankingsystem acting as a monitoring system for bank failures. Meanwhile, the Madiès(2006) model emphasizes the efficiency of applying an equivalent preventivemethod to avoid bank runs, which is relevant to bank failures that results fromdepositor’s confusion in the face of asset value shocks. This model was thefirst to offer an experimental study of mis-coordination based bank runs withinDiamond and Dybvig’s model.